What happens to 10yr yields when the Fed ends its QE program? Not what you, or the market, was expecting, eh?
History appears to be repeating itself as the chart below shows. 10yr rates and, shorter and longer rates too, rallied at the end of each QE program. They rose during the QE and dropped at the end of the QE. The pattern appears to be repeating itself.
US 10yrs hit peak their recent peak at the beginning of Jan at 3.05% and today sit at 2.71%.
Given global financial markets are starting to look closely at Emerging Markets for signs of collapse, Over the past week alone, we have heard about some Chinese lenders needing bailouts and we have also seen some banks halt withdrawals. I thought it useful to present this chart. This is a somewhat difficult economic concept for me to explain but I thought this chart did a pretty good job.
There is an economic theory called, "Current Account/Capital Account Parity". Basically, if a country is running a Current Account Deficit, they need to be running a Capital Account (cuffed as Foreign Reserves here) Surplus of the opposite amount so that the two are at Parity.
So which Emerging Economies are in the most trouble? Look at the bottom left of the chart and you will find Turkey, South Africa, India and Indonesia. Argentina doesn't even show up on the chart so it looks to be the worst of all. Korea, Russia, China and even Brazil don't look to be in as bad a shape.
It might be worth watching some market indicators on these 4 or 5 sovereigns for further signs of stress. 5yr Credit Default swaps would be something to watch as well as their sovereign yields.
1. Gold - Bottomed at 1187 in mid-Dec and is now 1256. Lots of comments recently that speculative long positions are at an all-time low which could prompt more upside potential.
2. Natural Gas - Remember the warm winter we had in 2012 that drove nat gas down to 1.91 in Apr/12? Well what about this cold winter we are having in 2014, driven by, not one, but two Polar Vortex events? Nat gas now at 4.95
3. 10yr Interest Rates - Who thought they would rise in 2014? Think again. 10yr Canada's bottomed in May/13 at 1.67%, hit 2.83% in Sept/13 and are have now broken that up-channel since then at 2.67% and are sitting at 2.42%. we believe there is further downside in rates as they retrace on a weakening Canadian and global economy.